A limited liability company is a business entity that combines the legal protection of a corporation with flexible taxation options. A domestic LLC is one operating in the state where it was organized. If the LLC wants to operate in other states, it becomes a foreign LLC and is subject to an additional qualifying process.

LLC Basics

A limited liability company -- LLC for short -- is a business structure that "combines the pass-through taxation of a partnership or sole proprietorship with the limited liability of a corporation," according to the Nolo legal website. By default, single-member LLCs are taxed as sole proprietorships, while multiple-member LLCs are taxed as partnerships. However, LLC owners may elect to have the business taxed as a corporation instead. If the LLC is taxed as a corporation, the business itself pays income tax. If it's taxed as a partnership or a sole proprietorship, profits and losses flow through to owners and are taxed at the individual level. Depending on the financial situation of the business and the business owners, one of these options may result in less tax than the other.

Becoming an LLC

To become an LLC, you need to draft articles of organization, register them with your state and pay a filing fee. Banks, insurance companies and trusts can't operate as LLCs. Some states also prohibit professionals such as lawyers and doctors from forming LLCs.

Domestic Versus Foreign LLC

For LLCs, domestic and foreign designations apply at the state level. A domestic LLC is one that does business in the same state where it filed its articles of organization. If it does business in any other state, it's considered to be a foreign LLC in that state. In this context, "doing business" means owning property or having a bank account, distributors, sales representatives, offices or facilities in the state. For example, if an LLC filed its articles of organization in Texas but has offices in California, it's a domestic LLC in Texas and a foreign LLC in California.

Consequences of Being a Domestic or Foreign LLC

A domestic LLC is already registered in the state where it does business. If it wants to do business in another state -- as in, become a foreign LLC -- there are a few extra formalities. The LLC will have to register with that state and might also have to present a certificate that proves it's in good standing in its original state of registration. The foreign LLC will have to pay a filing fee and will be subject to any applicable state taxes or fees for sales made in that state.

It a foreign LLC fails to complete this process, it might be subject to fines and penalties and have difficulty representing itself in that state's court system. BizFilings notes that if you own an unregistered foreign LLC and you're sued, "you can’t defend the lawsuit in that state, because your company is not recognized as a business there."